The Money Reform Party says that there is


Anne Belsey,

The three major political parties of Britain are agreed: there have to be cuts in public spending. For some in the Conservative Party, this desire for cuts in public spending might well be ideological. For others of their colleagues, and for the Labour and Liberal Democratic Parties, cuts are seen as an unfortunate necessity.
This opinion is even shared by many members of the public, who expressed it to the writer during the 2010 General Election. The reason for this view is the dramatic rise over the past few years of the level of the National Debt, which is the amount of money owed by the British Government.

Before the credit crunch happened, the National Debt stood at about £500 billion. It had taken 313 years to rise to this amount. In the past three years an additional £400 billion has been added to this figure, bringing it up to £900 billion as of May 2011. Conventional wisdom therefore assumes that in order to reduce it in the future, swingeing cuts in public spending, possibly coupled with an increase in overall taxation, will be necessary.

Ignorance of the money supply

Such thinking is based on an ignorance of the money supply and of the workings of a national economy.

The credit crunch, as the phrase suggests, consists of a reduction in the availability of credit within the economy. This led to a recession because most of the money within the economy is credit. There is very little 'real' money in existence.

A shortage of money means that economic activity slows down, businesses go bust, and unemployment and house repossessions rise, despite the fact that the productive capacity of the economy remains undiminished.

Money is debt

Within the British economy there is only some £57 billion of ‹real› money in existence (Bank of England Statistics, May 2011), yet economists reckon on the money supply as being in the region of £2000 billion (M4 - Bank of England Statistics). So what does all this extra money consist of if not notes and coins?
It consists of debt. This £2 trillion represents the amount owed to individuals, businesses, local and national government, and other banks by the commercial banks, and is backed solely by the amount owed to the commercial banks by individuals, businesses, local and national government, and other banks to the tune of some £3.5 trillion.

If you are puzzled by this, you are not alone. None of our senior politicians seem to understand it either!

A US Congressman, Dennis Kucinich, who does ‹get› the issue, put it thus: "The banks were in trouble, so they came to the Government for a loan, which it didn't have, so it borrowed the money from those self-same banks, who created it as new credit out of thin air!"

This 'Alice in Wonderland' way of working is how the money system works, in the USA, in the UK, and all around the world. The 'money' belonging to the commercial banks is their borrowers' debts to them. The banks 'lost' money because too many of their borrowers defaulted on their loans. As the banks' assets declined, so did their share price. As their share price fell, so did their capacity to create new credit (due to the requirements of the Basel Capital Accord).
To boost both the banks' capital value and asset base, the Government, in both the USA and the UK, borrowed credit from the commercial banks to invest in the commercial banks as share capital.

In the UK, another large loan to the Government came from the Bank of England's 'quantitative easing' scheme. Yet the Government (that is to say, the nation) owns the Bank of England, so why is this regarded as a debt that has to be paid back by taxpayers?!

Mortgages as money

In recent decades, most of the UK's money supply has come into existence as mortgages. This was the reason for the sky-rocketing house-prices. Houses were bought with new credit created out of thin air by the commercial banks, and as all this new 'money' fed into the economy, it facilitated the consumer boom.
But some people struggled to meet the costs of their large mortgages. As they defaulted on their loans, so the assets of the banks declined. This reduced their ability to extend further credit, even as old loans continued to be paid off. This reduced the money supply relative to the need for it. (Actually the money supply has not decreased. It has just not grown as fast as was needed to pay the interest on all the debt within the economy.) It was this relative reduction in the money supply which caused the recession, which would have been far worse had it not been for the Government borrowing a lot more new money into existence.
Short of money reform, the only way for both the National Debt to be reduced and for the economy to avoid complete collapse is for more private debt to be taken out. That is to say, more individuals, families and businesses will have take on more debt themselves. But who wants that?

From mathematical impossibility to simple solution

It is mathematically impossible for our present debt-based money system to continue indefinitely. For this to occur, the amount of debt within the economy - whether carried by individuals, businesses or Government - would have to rise year-on-year. But there is a limit to the amount of debt that we can each carry.
Paying off debt without creating even more debt cannot be achieved with debt-based money. It can only be achieved through the creation of a debt-free money supply.

Clearly such a supply of money should not be created by private commercial companies. (We have laws against counterfeiting!) It should be created solely by a public agency that is charged with creating just enough money to maintain inflation at 0%. Currently, the Bank of England does create 3% of the nation's money supply as debt-free, publicly-created money, which adds to the Government's spending power. The proportion just needs to be raised to 100%.

More money for public spending AND lower taxes

This new debt-free, publicly-created money will be made available to the Government and will enable it to increase public spending without increasing taxes, or to reduce taxes without reducing public spending, or to do a bit of both, to couple a moderate increase in public spending with a moderate cut in taxes.

Precisely which course is adopted will depend upon the complexion of the party in power. Whichever it is, we will all benefit from the introduction of a reformed money supply.

Money reform will:
• Cut through the present 'Alice in Wonderland' system of money and banking like a sharp knife through a Gordian Knot.
• End the nonsense of money being created by the commercial banks as debt-backed credit.
• Enable the 317 year-old National Debt to be paid off very quickly.
• Enable us all to enjoy both an increase in public spending and a cut in overall taxation.
• Create a positive money supply that will enable everyone within the country to get out of debt and stay out of debt.
• Create a sensible money supply that matches most people's belief as to how money does (or should) exist.
• Get the economy out of recession without the Government, businesses, families or individuals having to be burdened with even greater levels of debt.
• End the cycle of booms and busts.

Anne Belsey